Euro-zone economic and political pressures will intensify during the week and, again, selling euro rallies remains the best strategy. Confidence in the peripheral economies has taken another beating and the most likely outcome is for a further deterioration during the forthcoming week. The Euro-zone is continuing to suffer both net capital flows to the core from peripheral economies and net capital flows out of the Euro-zone altogether as the economic policies of despair and depression trigger a continuing exodus of funds. While the LTRO operations masked the immediate symptoms and encouraged carry-trade buying of European bonds, there has been no underlying solution.
The pressure will continue to build during the week with Thursday's Spanish bond auction a key test of investor confidence. There will be strong pressure on the ECB to resume its SMP programme and buy bonds ahead of the auction to stabilise market conditions. There will, however, be growing tensions and fractures within the ECB as there will be strong opposition from the German Bundesbank to any resumption of bond buying. Political tensions are also likely to be a growing feature as France heads for the first round of Presidential voting on April 22nd.
Voices preaching the virtues of status quo policies and peripheral depression will face increased opposition in France and throughout the peripheral economies as Greece opens its general election campaign. Credibility surrounding current policies is likely to deteriorate further while IMF and G20 meetings due at the end of the week are likely to be a key forum for opposition and the promotion of alternatives.
The only possible way current policies can succeed is by a huge Euro devaluation to boost external competitiveness. Although the German export machine would salivate at the prospect of such a boost to sales, the German orthodoxy would fiercely object to the inflationary consequences. The event horizon of current Euro economic policies has already been passed, but until this is more openly realised and admitted, there will be further attempts to keep the illusion on track. There will be further German concessions to help ease the pain, but no move yet to abandon policies completely. This gradual policy slippage and increase in tensions will sap economies and weaken the Euro as capital outflows continue.
As far as Euro-zone economic data is concerned, the latest German business confidence surveys will be extremely important with the German ZEW index released on Tuesday and IFO index on Friday. The IFO index edged higher for March while the ZEW index was substantially stronger as it surged higher over the past three months. The inter-play of domestic and Euro-zone risk factors will be illustrated within the data and a sharp retreat in the indices would have extremely important implications. If confidence in the German economy falters, there is very little chance of any improvement within the peripheral economies as the economic noose tightens.
The Bank of Canada's latest monetary policy decision will be announced on Tuesday. As has been the case throughout the past year, there is very little chance of a change in interest rates from 1.0%. The Bank's statement and monetary policy report the following the day will be extremely important for sentiment. As well as confidence surrounding the Canadian economy, the wider implications for North America and the global economy will also be important. The US is by far Canada's biggest export market and Canadian exporters will be extremely sensitive to any change in US conditions. The Bank of Canada's commentary will, therefore, be significant in shedding light on whether US demand is faltering.
The US retail sales data on Monday is the stand-out US release in terms of headlines, but the business surveys on Monday and Thursday are likely to be more important. The New York and Philadelphia PMI readings were both strong last month, but there was a significant deterioration in the new orders component. The latest readings will, therefore, be watched very closely to assess whether there is evidence of a more serious deterioration in conditions or whether demand is holding firm.
The latest UK inflation data is released on Tuesday, although the unemployment figures released 24 hours later are likely to be more important for the Sterling outlook. UK PMI surveys remained stronger than expected for April which suggested an underlying economic resilience. The PMI data has contrasted strongly with official data as the PMI construction-sector index strengthened for the first quarter while official data suggested a sharp contraction in activity. Although the labour-market data tends to be a lagging indicator, any decline in jobless claims would be another significant positive piece of evidence for the UK economy.